IHS: Europe to Account for 20% of All Netflix Subs by 201525 Aug, 2014 By: Erik Gruenwedel
SVOD pioneer to add 8 million Western European subs by 2018
With launches set to begin next month in six European countries, Netflix is primed to generate 20% of its global subscriber base from Europe by 2015, according to new data from IHS.
New territories include Belgium, France, Luxembourg, Austria, Switzerland and Germany, adding a collective five to six million new subscribers.
IHS has seen a large global shift toward online subscription services. Services such as Netflix are expected to average 18% annual growth over the next five years. The Netflix rollout will propel Western Europe’s online subscription market to an anticipated 35% average annual growth over the same period.
“Between the expansion and its growing popularity in markets such as the U.K., Ireland, Netherlands and Scandinavia, we anticipate that the company will add a total of eight million new subscribers to its European tally by the end of 2018,” Richard Broughton, director of broadband analysis with IHS Technology, said in a statement.
Germany is the second-largest online video market in Europe, behind the United Kingdom. IHS said the market presents not only huge opportunities but also tough obstacles.
Amazon, Vivendi and Sky Deutschland are established competitors in the SVOD market and German consumers are relatively low-spenders compared to their U.K. and North American counterparts. However, Netflix has seen success in Scandinavia, which also featured high cable TV penetration and online competition, so making ground is possible.
Burgeoning Growth, Costs
Content acquisition and cost of streaming form the bulk of direct costs for Netflix. Internationally, cost of revenue for Netflix (of which the key components are content and streaming costs) reached $267 million in the second quarter, or about $6.71 per month for each paid and free subscriber, according to IHS.
The research firm expects significant additional costs to be incurred from the six new markets. Netflix’s costs increased by approximately $30 million to $35 million in the quarter it launched in the U.K. and Ireland, expanding to as much as $80 million per quarter by the end of Q1 2014.
“Individually, the new markets have a lower-potential than the U.K., in subscriber terms. But in aggregate, due to their sheer combined size, we are likely to see another $80 million to $90 million in international costs in the first quarter post-launch. This addition will represent an increase of roughly one-third over the cost of the entire region,” Broughton said.
Marketing Key to Continued Growth
Content is the keystone of Netflix’s business, but part of the company’s success to date can be attributed to extensive marketing — particularly around its slate of original programming such as “House of Cards” and “Orange Is the New Black.” Marketing spend internationally hit its peak in Q4 2013, when it reached more than $57 million, dipping only marginally in Q1 2014.
“Taking the likely churn rate into account, this cost is paid off in a little over half a year of a paid streaming subscription,” Broughton said. ”Furthermore, global peak search volumes for the latest season of “Orange Is the New Black” were roughly four times higher than those for the first season, with a similar uplift for the second season of “Cards.”